Employee Share Plans - Do's and Don'ts For Private Companies

Posted by admin at 15:51 on 13 Feb 2017

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DO

Have a clear idea of what you want your share plan to achieve

Are you looking to sell or float the business? Do you want to meet specific financial targets or business plan KPIs? Are you looking at succession planning? Do you want to reward your employees for specific future performance, past service, or both? Do you want to attract key staff?

Work out how much equity you're prepared to give up

Will the controlling shareholders accept dilution of their interests?  What level of financial reward is to be delivered?  Have you set aside enough equity to involve future employees if your company grows?

See our article - Shareholder Dilution: Does Size Still Matter?

Decide whether you want to award shares now, or options that confer rights to acquire shares in the future

Using shares means you are making employees shareholders. Unless you use a separate class of shares (which is often possible e.g. non-voting shares), that means they get voting and dividend entitlements (though their interests may be very small). Share options are just a promise that employees can buy shares in the future at a price fixed today – so employee optionholders won't be able to vote or get dividends until they've exercised their options and bought the shares. So check what rights you want employees to have and when.

Consider who you want to be involved, now and in the future

All employees or just some? Future hires? Attract a new sales director? This will depend very much on what you want the plan to achieve. You also need to consider the culture of your organisation. A selective plan for key management figures only may create a divisive tension. If you promote a people centric value, then an all employee plan (e.g. a Share Incentive Plan [SIP]) should be considered as a foundation with perhaps a performance target top-up plan (e.g. Enterprise Management Incentive [EMI] or Company Share Ownership Plan [CSOP]) for senior staff.

Communicate your plan to the participants

This is an absolute must. Lack of communication will almost guarantee that your share plan will fail to motivate and inspire your employees and you lose the retention power. But, wait until you've fleshed out the above matters and be wary of promising too much too soon. Download our fact sheet here for more information.

DON'T

Be driven purely by the tax treatment of a scheme

Certain government approved plans carry significant tax advantages (e.g. EMI, CSOP, and SIP).  Don't be swayed by this. The most important thing about your share plan is for it to achieve your commercial objectives. Tax advantages are an added incentive, but they should always be secondary to the plan's main purpose. Commercial needs, especially about how a corporate group is structured, must take priority and a share plan designed to fit that and not the other way around.

Make your performance conditions too complicated

Complicated performance conditions are difficult to understand, which means participants don't know what they're working towards, and don't know if they've achieved target. This results in a huge reduction in motivation, one of the key aspects of any share plan. Worst case scenario is a performance condition where the measurement is disputed, resulting in a tribunal claim.  Keep it effective and keep it simple.

Make promises to employees before you've set up the plan

Until you've a clear idea about what plan you will use, who is going to be involved and the likely level of equity/reward, don't make promises. You may not be able to fulfil them, which could result in a disgruntled employee (or that worst case tribunal claim again).

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